America the Oil Exporter

The recent debate over sending U.S. oil abroad misses the point: The United States is already a budding export powerhouse.

The United States is once again the top oil producer in the world, surpassing Saudi Arabia and Russia. This year, America is on pace to pump out an average of 12 million barrels a day of crude oil plus gas liquids, an all-time record level. Add in biofuels and volumetric gains from refining, and the United States is effectively producing 14 million barrels a day. All this is the extraordinary result of the shale-oil revolution, in which new extraction technology—hydraulic fracturing, or fracking—has made vast reserves suddenly economically viable.

Yet by law, much of this bounty must stay in the United States. Since the 1970s, America has banned the unlicensed export of crude oil, a policy put in place after the crippling Arab embargo that followed the 1973 Yom Kippur War.

Today, the discussion about exports of U.S. crude oil is changing quickly. Producers have been aggressively lobbying Congress and the administration to lift the ban, and they seem to be getting results: Last month, the Wall Street Journalreported that the Commerce Department was planning to allow certain types of oil to be sold abroad as soon as August—news that sent the White House scrambling to deny that there had been any change in export policy whatsoever, and had many reporters scratching their heads.

But the White House itself is responsible for some of the confusion. Presidential adviser John Podesta’s public admission less than a month ago that the government was considering exporting oil from Eagle Ford, a shale formation in South Texas, focused industry attention on expected changes in what constitutes allowable exports of condensates, ultralight crude oil that is itself considered a petroleum product when separated from crude oil in a refinery. Thus when news came out of the dense, opaque Commerce Department decision-making process affirming that condensate separated from oil in a small process in the field could be exported as petroleum product, it was logical for observers to see the White House’s hand in the department’s clarification.

Even without a decision or legislation to lift various export bans and obstacles, the 65 percent increase in U.S. oil production since 2010 and the continuing relentless surge in U.S. production is rapidly changing the facts on the ground, which point to the United States possibly becoming a major exporter of crude oil of about 1 million barrels per day before the end of 2014, even as the country remains a net importer of oil. And condensate—the subject of the recent uproar—is central to that growth. Much of the 3.6 million barrel-per-day surge in U.S. oil production is in fact condensates, and much of it cannot be processed in U.S. refineries. So unless producers can send it abroad, that production growth could be in jeopardy.

That’s why the Commerce Department’s obscure and otherwise dense “clarification” is in fact a very big deal—a move that will mean additional U.S. hydrocarbon exports this year of more than 200,000 barrels per day of condensates, and potentially more than double that by the end of 2015.

Contrary to recently misleading statements in the press, the United States does not ban exports of crude oil. Although there is limited wriggle room, the markets are finding ways through the cracks, largely because crude oil in the United States is cheaper than in the rest of the world due to legal and logistical bottlenecks to exports.

One way to get the oil out is to convert it to petroleum products, which contrary to a recent White House statement, have been liberally allowed under general export license since 1981. The surge in diesel, gasoline and liquefied petroleum gas (LPG) exports has been stunning—the United States has shifted from a net importer of 3.5 million barrels per day of such products half a decade ago to a 2.5 million barrel-per-day exporter, heading for 3.5 million barrels per day and status as the world’s largest petroleum product-exporting country by this time next year. The United States has already overtaken Saudi Arabia as the largest export of LPGs (like propane and butane) and soon will be exporting as much LPGs as the entire Middle East.

The cracks are also opening on real oil: The law allows exports of crude to neighboring countries, and regulations are codified to license these exports so long as they are not then re-exported as crude oil. The United States exported a bit of condensate and no “real” crude oil to Canada until 2012. At the end of that year, the United States was exporting about 60 thousand barrels per day to Canada. Today those exports are around 270,000 barrels per day of crude and a similar amount of condensate, which is used to dilute Canadian crude so that it can be shipped to the United States. By the end of this year, exports to Canada are set to exceed 400,000 barrels a day and might even reach 500,000.

Meanwhile, a great deal of Canadian crude, greased by imported U.S. condensates, should be reaching American coastal markets—if not by the end of 2014, then certainly by this time next year. It looks as though a minimum of 200,000 barrels per day and possibly more will be re-exported from the United States and will appear in the U.S. current account as U.S. exports. During this same time frame, it looks as though the United States will also be exporting crude to Mexico, perhaps more than 100,000 barrels per day worth, given Mexico’s energy reforms and the benefits to consumers there from distilling U.S. light crude with a big yield of gasoline.

What’s more, because the U.S. and Canadian crude glut is pushing Mexican exports away from the U.S. Gulf Coast and to California, and because a significant amount of crude oil from North Dakota is also going to reach the U.S. West Coast by rail this year, the crude oil market there is getting crowded. As a result, producers in Alaska appear to be able to get higher returns by exporting some volumes to Asia through another hole in the dam holding crude oil within the United States. By the end of 2014, this could add another 100,000 barrels per day of U.S. crude oil sales abroad.

So the White House might be right—there is no change in policy on U.S. crude oil exports. But facts on the ground are pointing to significant changes in the context of the debate on exports. It’s one thing to talk about lifting the (partial) ban on crude-oil exports. It’s quite another to confront a world in which the United States is already a 1 million barrel-per-day exporter of oil and a 3 million barrel-per-day exporter of petroleum products. In other words, what’s the point of a debate on crude-export policy when the United States is on the verge of exporting more oil and oil products than most members of OPEC?

Ed Morse is global head of commodities research at Citi. The views expressed herein accurately reflect his personal views and were prepared independently of Citi Global Markets involvement in any investment or transaction.